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Indicators Show Decline In Oil Industry Reversing

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The right indications are taking shape that the debilitating down turn in the oil industry since November 2014 could be in the early stages of reversing that trend.

Amarillo-based petroleum economist Karr Ingham said Tuesday afternoon at the Texas Alliance of Energy Producers Expo & Annual Meeting that the simplistic concept of supply and demand is finally correcting the U.S. market. He said he has finally seen two key indicators take place that tell him the worst might be over: Decline in crude oil production levels at a quicker pace, and a decrease in the amount of crude stored in holding tanks like those in Cushing, Oklahoma.

But, he said, it’s still and wait-and-see approach as there have been false indicators in the past. He said the trend needs to be sustained an not the occasional change.

“We really haven’t seen much of any of that yet, so that’s kind of the caveat to maybe better prices, to some degree,” Ingham said. “It still seems generally unthinkable to me that we could be looking at $60 crude oil in 2016. Anything’s possible. Markets, sometimes, are irrational in the short term. They always get it right in the long term.

“We’ve seen these false positives along the way.”

He said such an incident occurred in the second quarter of 2015 when the price per barrel of crude went from $40 to $58, which turned out not to be the expected turn in the industry. Ingham, who works off the posted price of oil at which it is actually sold, said the jump from a low of $22.75 in February to $38 could also be a false positive, but the production and storage factors are in play this time.

Ingham said the non-decision by Organization of the Petroleum Exporting Countries, or OPEC, to place production caps shouldn’t have an affect on the oil industry here. The main reason, he said, is because the United States is the only country in which the mineral rights for oil is not centrally managed by the government. The U.S. doesn’t have a seat at the table because the nation’s oil industry is made up of thousands of individual companies, not a high-ranking official.

What’s more, he said, is the global market has had very little to do with the drop in prices in the United States. The U.S. relies on the markets and supply-and-demand economics to set the price of oil.

“I think they realize, and we should realize, that the United States was the chief offender in terms of raising global supply from levels where they generally used to be to where they were that caused prices to decline and decline to the extent that they have in the first place,” Ingham said. “In large part, the U.S. is still going to have to be the solution to that problem.”

Ingham recently estimated that at least 84,000 jobs have been lost in the oil industry in Texas because of the roughly 15-month decline, and the pain, unfortunately, might not be over. Based on lagging jobs statistics, he said 61,000 jobs were lost between December 2014 and September 2015, and it only stands to reason that more have been lost since then.

The economist said he would not be surprised if that number continued to grow, and it could be some time before those jobs return.

Ingham explained that over-production and oversupply caused prices to decline, which has, in turn, resulted in layoffs as companies decline production levels. He said it will take an increase in the price of oil per barrel and an increase in exploration and production before the jobs return.

“At some point we’ll be able to look back at this period in time and see where prices began to go up for good, and then the rig count would respond to that. Drilling permits would respond to that,” he said. “In theory, whenever prices bottomed out for good and began to rise to an extent sufficient to arrest to the decline in rig count … it would be six months or so after that before employment bottomed out and then began to go north again.”


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